Product Note

INVESTMENT IN GOLD: An Overview

Why choose Gold? Gold protects your portfolio from volatility because the factors, both at the macroeconomic and micro-economic fronts that affect the returns from most asset classes do not significantly influence the price of gold. Just after 9/11 and during the 2008 recession, while stock markets and bonds crashed across the world, gold held steady and, in fact, rose on that day by 6%.
Gold as a diversifying investment: Gold acts as a diversifying component to your portfolio. It is not

correlated to stocks, bonds and real estate.

Gold acts as a safe haven during uncertainty: Gold is a safe haven during times of political and

economic uncertainty. During uncertain times, investors who held onto gold were able to successfully protect their wealth. Consequently, whenever there is news and events that hint at some type of uncertainty, investors often buy gold as a safe haven making it an attractive investment avenue. gold are rather different from factors that affect other assets like say domestic fixed deposits. And therefore, if inflation in India were to dent the value of the Rupee, and consequently your wealth, it will have no impact on the price of gold (other factors remaining the same) thereby lending support to your wealth. In fact, in times of inflation, the smart money tends to move to gold, thereby driving up its price. expected to go up with demand. Most gold consumption is done in India and China and their demand is increasing with their increase in national wealth.

Gold has historically proven to be a good hedge against inflation: The factors that affect the price of

Worldwide gold production is not matching consumption: Due to the rising demand, the price of gold is

How can you invest in Gold? Today, an individual or corporate has the option of buying gold through different routes, based on their needs.

Physical Gold/Jewelry through bank or jeweler Commodity Exchange open an account in commodity segment and buy in demat or physical form Exchange Traded Funds (ETFs) through your stock trading account

The mode of buying or investing in gold would depend on your need. If you want to speculate or trade in gold, and gain from price volatility, then buying gold through commodity exchange would be best suited for you. If you goal is to make jewelry, then buying gold through a jeweler or a bank in physical form would be more suited for your need. However, if you are looking to buy gold for investment purpose or maybe investment now but use it later for your childs marriage, then buying gold through an ETF makes more sense. Given below is a comparison of buying gold through different channels. Generating Wealth. Satisfying Investors. 1

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Investment in Gold

A comparison of different modes of Buying Gold: Parameters Purchase Price Jeweler At a premium Banks At a premium Commodity Exchange Close to market price (but brokerage cost involved) Nil On the exchange, close to current market price (demat). If delivery is taken then uneconomical High Very High Gold ETF Close to market price Nil On the exchange, close to current market price High Very High

Risk of impurity Resale

High comes in varied carats Buy-back at a discount

Very Low Banks do not buyback, hence uneconomical

Liquidity Transparency in pricing and quality Mode of holding Risk of theft Denomination

Moderate Low

Moderate High

Wealth Tax What are gold ETFs?

Physical High Standardised. Lower denominations uneconomical due to high making charges Applicable

Physical High Standardised. Lower denominations uneconomical due to high making charges Applicable

Dematerialized/Physical None Different lot size, minimum 10 grams

Applicable

Dematerialized None Minimum of 1 unit (1 gram of gold) and in multiple thereof. No making charges None

Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion. Being ETFs, these funds are listed and traded on the stock exchange i.e. investors can buy and sell them like any other stock on the stock exchange, on a real- time basis. These are passively managed funds and are designed to provide returns that would closely track the returns from physical gold in the spot market. Gold ETFs are listed and traded on NSE and/or BSE. They are held in demat form just like the stocks. To invest in Gold ETF, you need to have a trading and demat account with a stock broker. What are the charges involved in buying gold through ETF mode? An investor has to pay brokerage, demat and trading account charges and expenses to the fund house for buying and investing in gold ETF. Why Gold ETFs?
Investment even with small amounts is possible: Gold ETFs allow investment in gold even in small

denominations, which makes it easier for the retail investor to participate. Convenient and hassle-free: Investing in gold ETFs will give the investor all the advantages of investing in gold while eliminating drawbacks of physical gold -- cost of storage, liquidity and purity of gold. Generating Wealth. Satisfying Investors. 2

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More Tax Efficient: Investing in paper gold gives investors tax advantages over investing in physical

gold. Firstly, gold ETFs are not liable for wealth tax, unlike physical gold. Secondly, gold ETF units held for more than one year qualify for long-term capital gains at 20%, whereas the holding period in physical form has to be three years to qualify for long-term capital gains. For less than three years, the gains are taxed at 30%.

Taxation Gold: Physical vs. Commodity Exchange vs. ETF Physical Gold Applicable Yes Applicable if sold within 3 years from purchase Commodity Exchange Applicable Speculation or Trading Gains are not categorized as short term. Purchase/sale without delivery is treated as speculative gain/loss. If delivery is taken, it is categorized as income/loss from business and taxed accordingly No ETF Not applicable Yes Applicable if sold within 1 year from purchase

Wealth tax Long term investment

Short term capital gain tax

Long term capital gain tax

After 3 years

After 1 year

How are Gold ETFs better than Gold Funds? Gold ETFs are better than Gold Funds because in comparison to gold funds, gold ETFs are less volatile. While gold ETFs invest in physical gold, gold funds invest in equities of gold mining companies; and gold stocks are more leveraged to the gold prices than the gold itself. If you are looking for returns that match to gold returns, then you should invest in Gold ETF. However, if you want to invest in equities of gold mining companies, gold funds would be the right choice, but remember they are more risky as their returns are correlated to performance of equity markets. Who should invest?
Investors looking to diversify:

- from other asset classes (equity, debt, real estate, etc.) - from physical gold holding - A small quality of gold can be held in the form of ETF, hassle-free

Investors who want to buy gold as an investment and gain from its ability to create wealth Individuals looking at gifting gold to their child in future, can start accumulating gold through ETF Investors who want to get the full value of their gold investment and believe in transparency

What should investors do? Gold ETFs offer investors a convenient means to invest in gold without the hassles of storage; also it spares investors of the concerns regarding the quality of gold. Gold ETFs would probably be appropriate for investors who wish to invest in gold in bulk and are likely to be faced with a storage problem. Stability, reduced volatility in a well-diversified portfolio, hedge against inflation, convenient investment vehicle to get tax-efficient exposure due to the absence of wealth tax and long-term capital gains tax, are all good reasons to invest in gold ETFs. Gold will also help you to diversify your portfolio remember Do not put all your eggs in one basket. Generating Wealth. Satisfying Investors. 3

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Investment in Gold

Which are the currently available Gold ETFs in India? As of now, there are nine gold ETFs available in India, their details are given below. Our recommended Gold ETFs are marked in blue. Name of the Scheme
Gold Benchmark Exchange Traded Fund UTI Gold Exchange Traded Fund Kotak Gold Exchange Traded Fund Reliance Gold Exchange Traded Fund Quantum Gold Exchange Traded Fund SBI Gold Exchange Traded Fund Religare Gold Exchange Traded Fund ICICI Prudential Gold Exchange Traded Fund* HDFC Gold Exchange Traded Fund*

NSE Code
GOLDBEES GOLDSHARE KOTAKGOLD RELGOLD QGOLDHALF SBIGETS RELIGAREGO -

Inception
March 2008 January 2007 June 2007 November 2007 February 2008 March 2009 January 2010 July 2010 June 2010

* Yet to be listed on exchange, their NFO closed recently. Our view As an investment option in gold, gold ETFs are more convenient and hassle-free than physical gold or commodity. Besides, investors are freed from the headache of worrying about the quality, safety, transparency in price and resale value. Moreover, investors looking to put in small amount in gold will also find gold ETF better, as one can buy as low as 1 gram of gold through the ETF way. From tax perspective too, Gold ETFs are attractive.

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Disclaimer: This document has been prepared by Arihant Capital Markets Ltd. This document does not constitute an offer or solicitation for the purchase and sale of any financial instrument by Arihant. This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst meticulous care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the analyst nor any employee of our company is in any way is responsible for its contents and nor is its accuracy or completeness guaranteed. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Risk Factors: Mutual Funds and all securities investments are subject to market risks and there is no assurance or guarantee that the Fund's objectives will be achieved. Past performance of the sponsor/Mutual Fund does not guarantee the future performance of the schemes of the Mutual Fund.

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